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BOE: Risk-reward in SONIA still tilted to less cuts - but 50bp Fed poses risks

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  • The August inflation print is still a bit softer than the BOE’s forecast, particularly for services prices. However, we don’t think it is weak enough for any MPC member to immediately change their underlying view.
  • The market reaction has been to price in a less aggressive cutting cycle (albeit this is a trend in wider global STIR markets today). We have gone from cuts being almost fully prices sequentially from November 2024 to May 2025 (with a further cut fully priced by August 2025) to pricing around 46bp by end-2024 (down 5bp) and 140bp cumulatively by August 2025 (down around 10bp). In terms of pricing for tomorrow’s MPC meeting, markets now price around a 9% probability of a 25bp cut, down from around 18% yesterday.
  • We still struggle to rationalize cuts of greater than 25bp for the BOE with inflation and wage growth at current levels – and by time they are more target-consistent we will be a lot closer to neutral if we have seen sequential cuts along the way.
  • So to us, yesterday’s pricing represents close to the plausible extreme, with risks of a slower cycle (and still risks skewed to a slower cycle than current pricing).
  • Having said that, we do think that if the Fed cuts 50bp there will be spillover to UK markets and at that point markets could move to price a more extreme cutting cycle than we had yesterday.
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  • The August inflation print is still a bit softer than the BOE’s forecast, particularly for services prices. However, we don’t think it is weak enough for any MPC member to immediately change their underlying view.
  • The market reaction has been to price in a less aggressive cutting cycle (albeit this is a trend in wider global STIR markets today). We have gone from cuts being almost fully prices sequentially from November 2024 to May 2025 (with a further cut fully priced by August 2025) to pricing around 46bp by end-2024 (down 5bp) and 140bp cumulatively by August 2025 (down around 10bp). In terms of pricing for tomorrow’s MPC meeting, markets now price around a 9% probability of a 25bp cut, down from around 18% yesterday.
  • We still struggle to rationalize cuts of greater than 25bp for the BOE with inflation and wage growth at current levels – and by time they are more target-consistent we will be a lot closer to neutral if we have seen sequential cuts along the way.
  • So to us, yesterday’s pricing represents close to the plausible extreme, with risks of a slower cycle (and still risks skewed to a slower cycle than current pricing).
  • Having said that, we do think that if the Fed cuts 50bp there will be spillover to UK markets and at that point markets could move to price a more extreme cutting cycle than we had yesterday.